Richelieu Hardware Ltd. (OTC:RHUHF) Q3 2018 Results Earnings Conference Call October 5, 2018 2:30 PM ET
Richard Lord - Chief Executive Officer
Antoine Auclair - Chief Financial Officer
Scott Carscallen - Mackenzie Investments
Good afternoon, ladies and gentlemen, and welcome to the Richelieu Hardware third-quarter results conference call. At this time, note that all lines are in a listen-only mode, but following the presentations, we will conduct a question-and-answer session which will be restricted to analysts only. [Operator Instructions]. Note the call is recorded on Thursday, October 4.
Thank you. Good afternoon, ladies and gentlemen, and welcome to Richelieu’s conference call for the third quarter ended August 31, 2018. With me is Antoine Auclair, CFO.
As usual, note that some of today’s issue include forward-looking information, which is provided with the usual disclaimer as reported in our financial filings.
During the third quarter, we continued to increase our sales and improve our EBITDA margin. We ended the period with a healthy and solid financial position.
We remain on the lookout for acquisition opportunities. And on September 4, we completed the acquisition of Chair City Supply, a U.S. distributor, which is our second U.S. acquisition this year.
Chair City distributes specialty products to furniture manufacturers from its four distribution centers, three in North Carolina and one in Tennessee.
Our network now includes 36 centers in the U.S. and 36 in Canada.
This acquisition strengthens our presence, our team, our product offering and our customer base in this significant market segment, while adding $15 million in sales on a yearly basis.
In the first nine months, we repurchased common shares 14.1 million, including 8.9 million in the third quarter.
Let’s look at financial highlights. Third quarter sales reached CAD 260.6 million, up by 2.9%, of which 2.2% from internal growth and 0.7% from acquisitions.
Sales to manufacturers stood at CAD 221.9 million, up by 4.4%, 3.5% from internal growth and 0.9% from acquisitions.
In the hardware retailers and renovation superstores, we achieved sales of CAD 38.7 million, down by 4.9%. In the same period of 2017, Richelieu had benefited from significant sales resulting from the initial introduction of new products in stores and higher cyclical sales, both in Canada and the U.S.
In Canada, sales amounted to $178.7 million, up by 3.8% entirely from internal growth. Our sales to manufacturers reached CAD 143.7 million, up by 5.4%. As for the hardware retailers and renovation superstores market, sales stood at CAD 35 million, down 2.5%.
In the U.S., sales totaled $62.4 million in U.S. dollars. Sales to manufacturers reached $60 million in U.S. dollar, up by 0.3%, of which $2.4% from acquisitions. And due to the termination of a supply agreement with the major customers, a decrease of 2.1% of internal growth. With comparable sales, internal growth in the manufacturer's market would have been 6.6%.
Sales in U.S. to hardware retailers and renovation superstores were down by 21.6% from the corresponding quarter of 2017, due to higher cyclical sales in the third quarter of last year, keeping in mind that year-to-date sales increased by 70%.
Total sales in the U.S. reached CAD 81.8 million in Canadian dollars, an increase of 1% and represented 31.4% of the total sales.
For the first nine months of 2018, sales totaled $745.9 million, up by 7.7%, 3.9% from internal growth and 3.8% from acquisitions.
At comparable exchange rates, for the first nine months of 2017, sales growth would have been 8.6%.
Sales to manufacturers reached $627.3 million, up by 7.2%, 2.7% from internal growth and 4.5% from acquisitions. Sales to hardware retailers and renovation superstores grew by 10.8% or CAD 11.6 million to total CAD 100.6 million, mainly due to our market development efforts that resulted in significant sales increase in the first and second quarters of 2018 compared to the same period of last year.
In Canada, sales reached CAD 503.7 million, up by CAD 41.5 million or 9%, of which 5% from internal growth and 3.9% from acquisitions.
Our sales to manufacturers amounted to CAD 405 million, up by 10.3%, of which 5.4% from internal growth and 4.9% from acquisitions. Sales to hardware retailers and renovation superstores market grew by 3.8%.
In the U.S., sales amounted to $188.6 million in U.S. dollar, up by 8%, 4.2% from internal growth and 3.8% from acquisitions. They reached CAD 242.2 million in Canadian dollar, up by 5.2%, accounting for 32.5% of total sales.
Sales to manufacturers reached $172.9 million in U.S. dollar, an increase of 4.5%, of which 0.6% from internal growth and 3.9% from acquisitions. With comparable sales, internal growth in the manufacturers market would have been 6.9%.
Sales in the hardware retailers and renovation superstores market were up 73.7% in U.S. dollars.
Third quarter EBITDA reached CAD 28.9 million, up by CAD 1 million or 3.6% over the third quarter of 2017.
Gross margin and EBITDA margin improved slightly from the third quarter of 2017. The EBITDA margin stood at 11.1% compared to 11% last year. For the first nine months, EBITDA was CAD 76.8 million, up CAD 3.9 million or 5.3%, and EBITDA margin stood at 10.3% compared to 10.5% for the same period last year.
Third quarter net earnings attributable to shareholders totaled CAD 18.4 million, up by 1.4%. Net earnings per share were CAD 0.32 basic and diluted, an increase of 3.2%.
Amortization expenses for the first nine months of 2018 amounted to CAD 9.8 million compared with CAD 8.5 million for the same period of 2017, up by CAD 1.3 million, resulting mainly from the increase in capital assets acquired last year.
For the first nine months, net earnings attributable to shareholders reached CAD 49.3 million, up by 3.2%. Net earnings per share was CAD 0.84 diluted, up by 3.7%.
Third quarter cash flow from operating activities before net change in working capital balances amounted to CAD 22.6 million or CAD 0.39 per share, an increase of 3.2%. For the first nine months, they were up 5.9%, totaling CAD 61.1 million or CAD 1.05 per share.
For third quarter of 2018, dividends paid to shareholders amounted CAD 3.5 million, up by CAD 0.2 million over the corresponding quarter of 2017. During the first nine months, we paid dividends of CAD 10.4 million, up by 5.2%, and we repurchased common shares for CAD 14.1. We also invested CAD 10.2 million, of which CAD 2 million for business acquisition and CAD 8.1 million primarily for the purchase of equipment to improve operational efficiency.
As of August 31, 2018, net cash totaled CAD 7.4 million and our working capital was CAD 328.9 million for a current ratio of 5:1.
Turning to our outlook, in the fourth quarter, we will remain focused on product innovation, market penetration and development strategies, on the integration of further synergies with our latest acquisitions.
We will continue to identify acquisition targets in North America, which are fully compatible with our growth objectives. We’re confident we’ll achieve good results for the year ended November 30.
That concludes my overview. Thank you for your interest and now I'll be happy to answer your questions.
Thank you, Mr. Lord. [Operator Instructions]. And your first question will be from Zachary Evershed [ph] at National Bank Financial. Please go ahead.
Good afternoon, everyone. Zach here for Leon. Thank you. I’ll kick it off with a question about the termination of the supply agreement with the major manufacturing customer. In Q2 last quarter, we had calculated the impact at about CAD 5 million. And now, we’re seeing about the same this quarter. Is that CAD 5 million figure correct?
Yes, it is.
Perfect. And so, will we see a similar drag in Q4 and Q1 or is there seasonality component to it?
I'm thinking Q4 and Q1. After that, would be free from that.
Perfect, thanks. Second question for you is on the drop in the retailers’ revenue. And I understand that Q3 2017 was a tough comp as it was up about 20% on new product introductions and higher cyclical sales. Can you give us a little bit of color on those new products?
We have new product that we have introduced in stores. For example, we have additional business with Lowe’s in Canada and some other customers as well. So, it’s been a big move in the course of last year because we were alluding those stores. So, it created sales that now are at the cruising level. Instead of losing, now we’re just cruising with the normal speed, which is normal. When you’re dealing with such customers in that type of business, it’s perfectly normal to see what we’re seeing now.
That doesn't mean we don't lose any business. We continue to gain business, but the main impact is the loading of the stores of last year, plus the cyclical sales with cyclical customers that typically buy only by cycle. You can have all those for one quarter like a type of Costco and that type of business. For a quarter, you have zero business. The next quarter, you have millions of dollar of business. So, we have to live with that. But at the end of the year, you're going to see that things are going to be very positive.
That’s very helpful. Thank you. And so, you said, at the end of the year, things are going to be very positive. We do see that Q4 2017 look like a fairly easy comp. So, you are expecting big things for Q4?
Maybe not big things, but it should be okay.
Wonderful. So, you mentioned that you’ve reached a cruising speed. Would you say that it’s right to think about sales to retailers as about a CAD 40 million a quarter business roughly?
What you're saying makes sense, but our goal here, and our job, is to continue to improve and to increase our market share in that market. So, we have many, many projects on the table that could bring further business that we should hear in the future.
But for the time being, yes, your CAD 40 million makes sense.
Excellent. Thank you so much. Would you be able to give us a geographic breakdown of your revenues? Were there pockets of weakness in Canada for example?
Yeah, yeah. Exactly. Actually, for the manufacturer’s market, Eastern Canada, our sales in the last quarter increased without acquisition by 4.4% for the Eastern Canada, which is Quebec and Maritimes and Atlantic area, Ontario was up by 2.9%, Western Canada was up by 8.4%, for a total of 5.5% for the Canadian market regarding the manufacturers. So, it's quite positive. And we see various markets, like the kitchen cabinet manufacturers market, still increasing, increasing by almost 6%. Commercial innovation, with the residential woodworkers by over 6% as well. Residential furniture is up still by 3.2% in Canada and office furniture by over 5%. So, basically, most of the market, we feel it’s still very healthy. There is a lot of activity still.
Beautiful. And you don't see any of your end markets slowing down?
No, no. The end market is going down? No.
Wonderful. And then, last one for you, even though revenue growth wasn't as strong as what we're expecting, your margins did come in above our estimate, which is a great sign. Are there initiatives and new technology implementation costs done at this point?
It’s almost done. As we said in previous phone calls – if I speak to last quarter – we basically said that, in the fourth quarter, we should see some of the benefits, but we have started to see some during the present quarters, mainly in the last month for us because we’re almost -- well, not almost – we finished with the improvement that we’re making in the U.S. in certain warehouses and in Canada. The main project was in Montreal. So, we’re almost finished with installing, the racking which will replace the space that was available since we had it installed in auto stores. So, basically, in the fourth quarter, everything should be up and running smoothly and should bring some benefits.
Thank you very much. That’s everything for me.
Thank you. [Operator Instructions]. And your next question is from Scott Carscallen at Investments. Please go ahead.
Yes. Hi, gentlemen. I just want to ask a question about the tariffs, in particular tariffs on Chinese imported goods. I think the last quarterly conference call, you said you were importing about 15% from China and we’ve seen tariffs already implemented on some Chinese goods. But in the event that the U.S., at the end of the year, decides to put tariffs on all Chinese goods and takes those tariffs to 25%, what does that mean for you guys? Are you able to pass that on immediately to customers?
Yes. It does mean that we have to pass it on to the customers. Basically, the way it should work is that we’re going to add something on the invoice for the extra duty that we have to pay due to that new regulation. So, there’s no doubt that Richelieu is not going to pay for those new taxes. So, we will have to charge the customers. I have in front of me the letter of one of our competitors, which is usually dealing mainly with the retailers in the U.S. That’s exactly – he’s saying that they will charge the cost of the duty to their customers as well as we will do as well as Richelieu.
So, we’ll possibly see basically inflation of costs?
That’s [indiscernible] with America. That does not apply to Canada. So, as far as we are concerned, 2,500 products are going to be touched. And we will immediately, as soon as we have -- charge the customers.
Okay, great. Thank you for that clarity.
Thank you. [Operator Instructions]. And at this time, Mr. Lord, we have no other questions. I would like to turn the call back over to you, sir.
Thank you to all of you again. And it’s always a pleasure for us to talk to you, if you decide to give us a call. Have a great day. Bye-bye.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.